Pfizer's third quarter financial results were well ahead of consensus expectations on both the revenue and earnings lines, despite ongoing headwinds from patent expiries and currency pressures on its cost base. Management noted a number of significant factors in the quarter, including a $950m hit from the generic erosion of several large pharma products and a negative $150m or 1 percentage point (ppt) top-line impact from healthcare reform in the US. On the positive side, third quarter revenues enjoyed a $951m or 5 ppt contribution from currency and a $353m or 3ppt benefit from the consolidation of King Pharmaceuticals. Overall, Pfizer's Biopharmaceutical business advanced 6% YoY to $14.7b with domestic sales dropping 4% in the quarter, while international revenues jumped 14% (with an 11 ppt currency benefit). Within the Biopharmaceutical division, its Emerging Markets business showed the fastest YoY growth in the quarter, with an 18% gain (+12% without currency). Pfizer's Animal Health, Consumer Healthcare and Nutrition businesses all recorded double-digit sales gains in the quarter. Despite strong contributions, management still intends to split-off its Animal Health and Nutrition businesses with an announcement of its plan expected in 2012.

Pfizer's gross margin declined in the quarter, with a deterioration in its product mix and the weak US dollar inflating its overseas expenses. Specifically, currency added $551m or 6 ppts to third quarter operating expenses, with a 10 ppt impact on cost of goods sold, and 5 ppts on SG&A costs. The company's total operating costs increased 3% YoY, with savings from prior restructuring initiatives holding spending on the SG&A and R&D lines (ex-items) below the pace of top-line growth. As a result, Pfizer's operating margin improved 2.3 ppts form the prior year, excluding special charges.

Overall, Pfizer's non-GAAP earnings of 62-cents a share showed a 15% improvement over the prior year, and were 6-cents a share ahead of consensus forecasts. Pfizer's non-GAAP earnings exclude purchase accounting charges, acquisition-related costs and other special items, as well as the $1.3b gain from the sale of its Capsugel business. The company's bottom-line also benefited from a 3% reduction in its share count from the prior year, due to $6.5b in share repurchases year-to-date, with $2.1b completed in the third quarter. With the divestment proceeds from Capsugel, management announced an expansion of its share buyback goal to $7b to $9b for the full-year, which is up from its prior $5b to $7b target.

Following this quarter's strong financial performance, management upgraded its sales and earnings guidance for the full-year. The company now expects $66.2b to $67.2b in revenues, which is the upper-end of its prior $65.2b to $67.2b full-year range. Non-GAAP EPS guidance moved up to $2.24 to $2.29 for 2011, from a range of $2.16 to $2.26, previously. Management did not make any changes to its 2012 forecasts, which will include the first full-year impact from the nearing Lipitor patent expiration in the US market. The company believes it has taken financial measures to manage its business through the expiration of the Lipitor patent, with cost-cutting and share buyback activity, while remaining committed to dividend increases for shareholders. Pfizer will also participate in an authorized generic version of Lipitor through its deal with Watson. The company's intention to divest its Animal Health and Nutrition businesses should continue to support Pfizer's strong financial position and buyback activity in the near-term. The timely regulatory approvals of its Eliquis (in US), tofacitinib, and axitinib projects, along with the successful launch of Xalkori, and Prevnar 13 line extensions will be needed to help restore confidence in the longer-term growth prospects of its pharma business.

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